With any type of residential real estate, the ability of renters or owners to afford where they live is one of the most important factors in a healthy market. In the beginning, most residents start out as renters, then save enough to make a purchase and graduate to home ownership.
The problem of affordability for home ownership in California has been well documented. So has the issue of affordability in rental housing. More recently, the state legislature and the governor ram-rodded a bill into law that establishes a statewide rent control regulation that will neither increase affordability nor provide more housing.
The bill will cap rent increases on certain classes of apartments to 5% a year; and many landlords fully intend to do this every year because they have lost control of the ability to increase rents at their own pace based on true market value. Also, this bill essentially eliminates the incentive to keep properties fully maintained and to fund improvements, not to mention it guts the incentive to purchase many properties that fall under the rent control. In cities like Los Angeles and New York, it is not hard to see that the results of rent control is a massive failure.
The real root of the problem for both rental dwellers and aspiring homeowners can be found in a study, released by The Apartment List data analytics firm, that looked at rents from around the country and came to the conclusion that half of the U.S. renter households are cost burdened –meaning that they are spending more than the 30% of their income on rent, leaving little to cover necessary expenses or to save for a down payment on a purchase.
For homebuilders and those trying to sell real estate, this equates to fewer renters able to graduate to purchasing their own home. In the study, which used statistics comparing median rental rates with income, it was found that renters wanting a two-bedroom apartment are cost burdened in 25 major markets across the U.S. – and 12 of those are in California.
San Francisco is the worst, with the average renter needing to earn almost an additional $25,000 a year to meet the 30% mark for rent, which averages $3,096 for a two-bedroom unit in that city. Long Beach is eighth on the list, with the average renter needing to make an additional $10,000-plus to reach this goal. Los Angeles is sixth, with renters needing almost $14,000 in additional income.
Among the problems that high rents create for all residents is rising homelessness, less economic activity for businesses in general and fewer essential workers who can afford to live near work, thereby impacting roads and highways with more traffic.
Experts point to the state’s low vacancy rate for rental units of 4.2%, and the healthy optimal rate of 5.5% that should lead to a moderating of rents. The solution is plain: more multi-family construction on the low- and moderate-income side. Most new rental construction is centered around luxury units, since this is where the greatest profits are.
It doesn’t look like there is going to be a quick solution, however. Progress has been slow, according to the Apartment List, which predicted that the peak years for apartment construction won’t be until 2022-23.
During a recent Southern California Association of Governments (SCAG) presentation in Indian Wells, some of the causes for the housing crisis given were: the onerous permitting process; lack of funding for developers, builders and cities; construction costs; and the high cost of land. This agency covers 191 cities and six counties, 18.9 million people and represents the sixteenth largest economy in the world. The geographic area studied includes Ventura, Los Angeles, Orange, San Bernardino, Riverside and Imperial counties. The organization is working on a regional housing needs assessment and developing solutions such as affordable housing overlays, area specific plans, smaller lot development, streamlining local permitting processes and working with communities to connect their shared goals.
SCAG’s Housing and Land Use Planner Ma’Ayn Johnson pointed out at the presentation that the some of the costs of not addressing this problem will be more overcrowding, health and safety issues, as well as out-migration of talent in the region and economic impacts like the relocation of Toyota’s North American headquarters to Texas, that resulted in a loss of thousands of jobs and tens of millions in state and local tax revenue.
It most likely will take a combination of wage growth and more multi-family housing to bring rent in California more in line with the desired ratios so that people can thrive and eventually afford to be homeowners.
Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call (949) 457-4922.